QUESTION 6 (25 marks) (a) Indicate whether each of the following statements is TRUE or FALSE and provide a brief explanation for your answer in less than 60 words in each part. (Note: Marks will be deducted if your answer exceeds the word limit.) (1) Diversification is often mentioned as a benefit of one firm acquiring another. In finance, diversification per se is a valid reason for mergers or acquisitions even though it does not produce increases in value to the firm. (5 marks) (2) The distribution of shares in a subsidiary to existing parent company stockholders is called a(n) carve-out or equity carve-out. (5 marks) (b) Firm A is analyzing the possible acquisition of Firm B. Neither firm has debt. Firm A forecasts that the acquisition would result in incremental after-tax cash flows of $60,000 per year for the foreseeable future (indefinitely). The current market values of Firm A and Firm B are $700,000 and $300,000, respectively. The appropriate discount rate for the incremental cash flows is 12 percent. (1) (i) What is the present value of the synergy from the merger? (2 marks) (ii) What is Firm B's value to Firm A? (2 marks) (2) Suppose that Firm A is considering an offer of $500,000 cash for the acquisition of Firm B. (i) What is the premium of the merger? (2 marks) (ii) What is the estimated market value of the combined firm (VAB)? (2 marks) (iii) What is the net present value of the merger? (2 marks) (3) As an alternative to the $500,000 cash offer described in part (2), Firm A is considering offering 40 percent of its stock to the stockholders of Firm B. (1) What is the equivalent dollar cost of the stock offer (stock payment)? (2 marks) (ii) What is the net present value of the stock offer? (2 marks) (4) Which method, that is, cash offer or stock offer, mentioned in parts (2) and (3) above should Firm A use to acquire Firm B? (1 mark) ***THE END***